Zero down! Zero percent interest until 2007!! Does this sound familar to you? I bet it does because the glut of supply far outstrips the demand of certain products such as furniture or GM gas-guzzling trucks. Both products have high markups allowing them to offer deep discounts and yet managing to make a profit off their sales.
There are other options to own these ‘luxury’ items – through rent-to-own stores at least for furniture. For other products, you have the lease option. The Brookings Institution recently released a report [PDF link] that blamed the rent-to-own stores for ‘preying upon its customers’. The damning evidence [via Buffalo News] was in form of an ancedote that told the story of Nicole Hennegan who leased a used 36″ color television from a rent-to-own store after paying $80 monthly payments. After she missed her fourth payment, the television was reposssed but the underlying implication of this story was that if she had continued paying her monthly dues, she would have ultimately paid $900 for an otherwise much cheaper television set. Those who blame the stores for such predatory pricing are missing an important economics lesson – Ms. Hennegan was perfectly capable of not opting to rent a 36″ television which considering her pecuniary condition was a luxury item anyway.
Thomas Woods, in his story, Do Rent-to-Own Stores Hurt the Poor rightly points to the oft-cited assumption that poor people are unable to make sound economic decisions [partly also the reason for food stamps when simply giving cash would maximize their marginal utility]. He also lists several reasons that advocates for the poor offer as reasons to regulate rent-to-own stores:
- Ms. Hennegan may not have had a large electronics store nearby.
- She may also not have had a car, or any friends who had a car, or any friends who had a car who knew how to get to an electronics store.
- She couldn’t have used public transportation, though it is not exactly clear why not.
- She couldn’t order the product online, since she lacked Internet access.
- She knew no one who had Internet access that she could use for ten minutes.
- She was also unable to go to the public library, where Internet access is available for free. She could not use public transportation to get to the public library; see #3 above.
- Even if she could have ordered the television online, she couldn’t have purchased the television because she lacks a credit card.
- You don’t need a credit card to order merchandise from Amazon.com – just a checking account – but she couldn’t order the TV there because, well, she just couldn’t.
But I agree with his underlying argument that these reasons seem to imply the the protagonist in the example above is a helpless victim unable to make smart decisions regarding her own financial health. And any efforts at regulating such stores would be akin to micro-managing social conditions and would also not allow poor people to benefit from enjoying ‘luxuries’ that the smart ones can effectively manage. In the name of social justice, we can offer to increase awareness of such pricing schemes and probably offer financial workshops to help them make sound decisions but completely banning or preventing rent-to-own stores is not the right solution. Probably even if they are aware of the financial downside, they are willing to make a trade-off for short term benefit; something that we cannot deny them.
After all, the Georgia State Lottery program that funds the HOPE scholarship is also accused of taking money from the poor to fund the rich kids education.